These Internet of Things Stocks Can Fly Even Higher in 2018

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The Internet of Things (IoT) market is already worth billions of dollars. One estimate suggests that the global IoT market's revenue could increase from $157 billion in 2016 to $457 billion in 2020, driven by the growth of smart cities, industrial applications, connected vehicles, and healthcare.

Of these sub-segments, smart cities and industrial applications will clock the fastest compound annual growth rates (CAGR) of 26% and 24%, respectively. This is great news for IoT specialists Sierra Wireless (NASDAQ: SWIR) and Cypress Semiconductor (NASDAQ: CY), as both companies are targeting these fast-growing niches within the IoT space, setting them up for a strong performance in 2018.

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Sierra's smart city business will hit critical mass

The smart city concept is currently in its infancy, even though it only came into being a few years ago. But 2018 could be the year when this concept starts gaining widespread adoption thanks to government sponsorships.

Canada has just announced funding for 72 smart cities, and India's housing minister is confident that the country will start witnessing the deployment of smart cities by June 2018. Similarly, Vietnamese capital Hanoi will start spending $4 billion on a smart city project slated to begin in 2018.

So smart city adoption looks set to hit critical mass in the new year. This opens up a good opportunity for Sierra Wireless to boost its business, as it offers a wide range of solutions to enable the smart city revolution. But Sierra's focus on LPWA (low-power wide-area) technology will be its biggest catalyst in this space.

LPWA technology will play a crucial role in smart city deployment, as it helps devices communicate with each other and with the cloud for long time periods by consuming low amounts of power. This helps in the creation of a single network that connects to the cloud, allowing the different elements of a smart city to talk to each other in an inexpensive manner.

As a result, LPWA deployment has been gaining impressive momentum: a total of 110 such networks were either announced or launched by the end of 2016. In the new year, the number of LPWA contracts awarded is expected to increase given the technology's potential to lower connectivity costs.

Specifically, the LPWA market is expected to hit $1 billion in revenue this year. Sierra Wireless is well-placed to tackle this opportunity, as its LPWA modules are already being tested by telecom carriers in North America, who are expected to start deployments in 2018 as networks are upgraded.

Sierra claims to have a first-mover advantage in this space through its recently launched dual-mode LPWA modules, which allow for connection to multiple networks. As a result, the module can switch to slower 2G networks in areas where 4G LTE connectivity is weak, giving telecom carriers a good reason to select Sierra's offering over other modules.

Now telecom carriers such as AT&T are busy developing smart city offerings. So it wouldn't be surprising to see Sierra landing a big contract thanks to its recently launched LPWA modules.

Cypress could win big in industrial

Cypress' industrial business used to supply 19% of its total revenue at the end of 2011, but its contribution increased to 24% at the end of 2016. Going forward investors can expect to see the industrial business playing a bigger role in the chipmaker's fortunes as the company is targeting a broad range of applications in this area.

Cypress' microcontrollers and memory solutions can be deployed in factory settings, as they can be used in industrial sensors to enable wireless connectivity for long time periods in harsh environments. These products can be used to power different components involved in smart factories, such as smart displays, robot-controlled motors, smart meters, factory automation, and others.

The industrial IoT market could be worth a whopping $933 billion by 2025, growing at a compound annual growth rate (CAGR) of 27.8% over the next seven years. Grand View Research forecasts that the industrial IoT market already exceeded $100 billion in value in 2016, so it will get even bigger in 2018 based on the estimated growth rate. The more important thing to note is that the industrial IoT market's growth isn't going to subside soon, so it will remain a long-term catalyst for Cypress.

Cypress isn't restricting itself to industrial IoT. The company has already made rapid advances in the connected car space by landing marquee customers such as Denso, Continental AG, Bosch, Audi, and Toyota. At the same time, the company's consumer business has gained impressive traction of late thanks to big wins at Apple, FitBit, and Nintendo, driven by its leadership in USB-C technology as well as its Wi-Fi/Bluetooth combo chips.

In fact, Cypress leads the USB-C market with a market share of 35%. This space is currently growing at an annual pace of 89% thanks to the technology's adoption in consumer devices, and it is likely to be deployed in IoT applications as well because of rapid data transfer rates and small size.

Cypress is investing in the right catalysts to give its business a nice boost not just in 2018, but also, in the long run, thanks to the fast-growing end-markets.

The same can be said about Sierra Wireless as it looks like smart city deployments are only just getting started and its dominance in this area enhance the IoT specialist's LPWA business.

Investors should keep holding both Sierra Wireless and Cypress Semiconductor in their portfolios despite their impressive stock market gains in 2017, as they show more upside potential thanks to the IoT opportunity.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple, Fitbit, and Sierra Wireless. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Cypress Semiconductor. The Motley Fool has a disclosure policy.